In a recent case brought by the estate of a deceased borrower against a defendant servicer involving a due-on-sale clause, the U.S. Court of Appeals for the Sixth Circuit held that a state law incorporating the Garn-St. Germain Act did not implicate significant enough federal issues to confer subject matter jurisdiction, and remanded the case to state court.
A due-on-sale clause is a contract provision which authorizes a lender to declare due and payable any outstanding sums secured by the lender’s security interest in the property, if the loan is sold or transferred without the lender’s prior written consent. Congress passed the Garn-St. Germain Act (Act) to make due-on-sale clauses presumptively valid in every state. However, the Act prohibits due-on-sale clauses in nine enumerated exceptions. For example, due-on-sale clauses are prohibited when a borrower dies and the property is transferred to a relative, or when the spouse or children of the borrower become an owner of the property. The Act itself does not create a federal cause of action or set forth explicit remedies. Rather, some states, such as Michigan, have created private causes of actions for damages and injunctions against lenders who violate the Act’s nine exceptions.
In Bantom et al v. Tran et al, the estate of a deceased borrower brought Michigan state law claims against a defendant servicer after the deceased borrower’s property was foreclosed on. The estate also brought a federal claim under the Garn-St. Germain Act. The defendant-servicer removed to the United States District Court for the District of Michigan on the basis of federal question jurisdiction, citing the Garn-St. Germain Act. The court granted judgment in favor of the defendant-servicer on all counts, finding, among other things, that the Act did authorize private right of actions.
On appeal, the Sixth Circuit decided sua sponte to focus on whether the district court had subject matter jurisdiction in the first instance. Article III of the United States Constitution limits the types of cases that can be heard by federal courts, such as those cases “arising under . . . the Laws of the United States.” When a case “arises under” federal law, it is said to create a federal question and thus confers subject matter jurisdiction to federal courts. Thus, if a case is filed in state court and it “arises under” federal law, the defendant may remove the case federal court. As explained by the Sixth Circuit, a case arises under federal law when either: 1) the cause of action involved was created by federal law; or 2) the state-law claims implicate significant federal issues.
In Bantom, the Sixth Circuit held that Garn-St. Germain Act did not satisfy either test. The opinion did not spend much time discussing the first test because the plain text of the Act does not explicitly create a federal cause of action. Under the second test, the Court used a four factor analysis to determine whether significant federal issues were involved. Ultimately, the court concluded that all factors cut against subject matter jurisdiction because: 1) there was no federal agency involved; 2) it was “hard to fathom” how “determining the contours” of the Act’s nine exceptions was important to the federal government; 3) resolution of the Garn-St Germain Act issues would likely not end the case; and 4) only two states provide causes of action for violations of the Act. The opinion concluded by noting that state contract and property law are “uniquely within the province of the states,” and that Congress chose not to create a federal remedy, but rather leave that task to the states.
Judge Moore filed a lengthy dissent noting that Congress passed the Act because due-on-sale clauses were adversely affecting secondary mortgage markets “which rely on uniform, homogenous mortgage documents to efficiently operate.” At the time of the Act’s enactment in 1982, varying state-law restrictions on due-on-sale clauses were causing the FHMLC and FNMA to “alter their investment practices in several states.” Judge Moore concluded that exercising jurisdiction would have been “consistent with Congress’s intent to ensure that state courts do not restrict the enforcement of due-on-sale clauses.”